Comparing Registered Investments

As of January 1st, 2009, Canadians have one more registered investment option to choose from. If your family cannot financially afford to make the maximum contribution to each tax-assisted plan, it is important to decide what role the Tax-Free Savings Account will have in your overall saving plan.

Determining whether an RRSP, RESP, or TFSA is the most appropriate option will largely depend on your expected financial situation, level of income, and on your saving goals. For instance, since a withdrawal from your Tax-Free Savings Account doesn’t have tax consequences, you might be better off using it to save for pre-retirement needs, rather than dipping into your RRSP.

RRSP
RESP
TFSA
Purpose Save for retirement Save for a child's post-secondary education Save for short and long term goals.
Contribution Room Dependant on income Lifetime maximum of $50,000 $5,500 per year (adjusted annually for inflation)
Contribution Tax Deductible
Yes
No
No
Taxation on Investment Income Only when withdrawn Only when withdrawn Never
Taxation Upon Withdrawal Both the contribution and investment earnings are taxable. The investment earnings are applied towards the student’s taxable income. Both the withdrawn contribution and investment earnings are exempt from tax.
Withdrawal Pre Retirement

$20,000 can be temporarily withdrawn for education or $25,000 for home ownership (amount treated as income if not repaid).

Once withdrawn, the contribution room is lost.
Funds can be withdrawn for your child’s post-secondary education. If your child decides not to pursue further education, under certain conditions, RESP assets can be transferred into your RRSPs.

Withdrawals can be used for any purpose and do not have to be repaid.
After withdrawal, the contribution room is not lost and can be redeposited in the following year.

Mandatory Withdrawal Savings must be drawn down after you reach 71 years of age. Plans must terminate after 35 years. Not forced to withdraw at any age or milestone.
Federal Income-tested Benefits Withdrawals will affect federal income-tested benefits and credits.

Withdrawals will affect federal income-tested benefits and credits of the student.

However, contributions are matched with up to a 20% government grant – up to $7,200 lifetime limit per beneficiary.
Investment earnings and withdrawals will not affect eligibility for federal income-tested benefits and credits.

Key Points to Consider

  • If you expect your marginal tax bracket to lower upon retirement, it is important to factor in the tax deductible nature of RRSP contributions. By delaying taxation on your income until you move into a lower tax bracket, RRSPs have the potential to be a better retirement alternative than TFSA.
  • If you are saving for your first home or education, the Tax-Free Savings Account has significantly more flexibility than an RRSP. Although you can withdraw funds from your RRSP for education or your first home, when compared to TFSA, the repayment rules are more rigid. An RRSP withdrawal must be repaid within 15 years and the minimum repayment is 1/15 of the amount borrowed. For education, $10,000 can be withdrawn per year to a total maximum of $20,000. The education amount must be repaid over a 10-year period.

Learn how to maximize the TFSA benefit.

To open a TFSA, visit your Community Savings branch.